IMF Says BOJ Should Avoid Premature Exit from Monetary Easing

The International Monetary Fund said the Bank of Japan should avoid a premature exit from monetary easing, advising it to maintain its policy framework.

  • IMF advises BOJ to keep current monetary policy framework
  • Fund reiterates recommendations on long-term yield flexibility

The recommendation from the International Monetary Fund is to ensure that Japan’s economy continues to recover from the pandemic. The Bank of Japan should maintain its current monetary policy until inflation sustainably reaches its 2 percent target, according to the International Monetary Fund’s annual report on Japan released on Thursday. The Bank of Japan should also be ready to implement additional measures if necessary to support the economy, the report said. The IMF report acknowledges that Japan’s economy has shown signs of recovery, with increased exports and industrial production, as well as increased business and consumer sentiment. However, the report also highlights challenges facing Japan’s economy, including a shrinking population and the risk of a resurgence in Covid cases.

The Bank of Japan has taken a number of measures to support the economy during the pandemic, including negative interest rate policy and large-scale asset purchases. However, the IMF report suggests that the Bank of Japan could do more to support the economy, such as expanding its asset purchases and implementing yield curve controls to lower long-term interest rates further. The report also urges Japan to implement structural reforms to increase productivity and support growth. The IMF recommended that Japan implement measures to increase labor force participation, promote competition in product markets, and improve corporate governance. Overall, the IMF report on Japan highlights the importance of continued support for the Japanese economy as it recovers from the pandemic.

German inflation

German inflation drops but there’s no sign of broader downward trends

German headline inflation dropped in March to the lowest level since last summer. However, there are still no signs of any broader disinflationary trend outside energy and commodity prices

Has the disinflationary process started? We don’t think so. German March headline inflation came in at 7.4% Year-on-Year, from 8.7% YoY in February. The HICP measure came in at 7.8% YoY, from 9.3% in February. The sharp drop in headline inflation is mainly the result of negative base effects from energy prices, which surged in March last year when the war in Ukraine started. Underlying inflationary pressures, however, remain high and the fact that the month-on-month change in headline inflation was clearly above historical averages for March, there are no reasons to cheer. 

No signs of broader disinflationary process, yet

Today’s sharp drop in headline inflation will support all those who have always been advocating that the inflation surge in the entire eurozone is mainly a long but transitory energy price shock. If you believe this argument, today’s drop in headline inflation is the start of a longer disinflationary trend. As much as we sympathised with this view one or two years ago, inflation has, in the meantime, also become a demand-side issue, which has spread across the entire economy. The pass-through of higher input prices, though cooling in recent months, is still in full swing. Widening profit margins and wage increases are also fueling underlying inflationary pressure, not only in Germany but in the entire eurozone.

Available German regional components suggest that core inflation remains high. While energy price inflation continued to come down and was even negative for heating oil and fuel, food price inflation continued to increase. Inflation in most other components remained broadly unchanged. Given that energy consumption is more sensitive to price changes than food consumption, it currently makes more sense for the European Central Bank to only look at headline inflation that excludes energy but includes food prices when assessing underlying inflationary pressure.

All this means is that just looking at the headline number is currently misleading; there are still few if any signs of any disinflationary process outside of energy and commodity prices.

Headline inflation to come down further but core will remain high

Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the ECB to take this data at face value. Government intervention and interference, whether that’s temporary or permanent or has taken place this year or last, will blur the picture. In Germany, for example, the Bundesbank estimated that energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year. And there is more. Negative base effects from last year’s energy relief package for the summer months should automatically push up headline inflation between June and August.

Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather could are likely to push down headline inflation faster than recent forecasts suggest. On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through and increasingly widening corporate profit margins and higher wages.

Even if the pass-through slows down, core inflation will remain stubbornly high this year.

ECB has entered final phase of tightening

As long as the current banking crisis remains contained, the ECB will stick to the widely communicated distinction between using interest rates in the fight against inflation and liquidity measures plus other tools to tackle any financial instability. The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode.

The turmoil of the last few weeks has been a clear reminder for the ECB that hiking interest rates, and particularly the most aggressive tightening cycle since the start of monetary union, comes at a cost. In fact, with any further rate hike, the risk that something breaks increases. This is why we expect the ECB to tread more carefully in the coming months. In fact, the ECB has probably already entered the final phase of its tightening cycle. It’s a phase that will be characterised by a genuine meeting-by-meeting approach and a slowdown in the pace, size and number of any further rate hikes.

We’re sticking to our view that the ECB will hike twice more – by 25bp each before the summer – and then move to a longer wait-and-see stance.

source: ING

China CNY

China’s central bank pumps more liquidity into market

The People’s Bank of China has already cut its Required Reserve Ratio and has continued to pump liquidity into the money market over the past few days. Is this about global market volatility or is it more about the domestic economy?

What’s behind the large liquidity injection by the PBoC?

China’s central bank, the PBoC, has injected significant liquidity into the market since 21 March. From the 21st to the 29th of the month, the central bank injected more than CNY850 billion of net liquidity into the financial system. This includes CNY352bn injected through daily open market operations and CNY500bn by lowering the Required Reserve Ratio (RRR) which took effect on 27 March.

We believe that there are at least two considerations behind these liquidity injections. 

These operations are occurring at the end of the first quarter. In China, loan growth for the year is usually booked in the first three months. This is a seasonal phenomenon and pushes up interbank interest rates at the end of the first quarter. As the chart shows, the overnight SHIBOR touched 2.5% on 20 March. Therefore, we think that loan growth should continue to be very strong in March compared to 2022, even after the rapid growth in the first two months. If this is the main reason for the PBoC’s big liquidity injection, this should be seen as a positive sign for economic growth.

The volatility in global financial markets is not over; there may be some ups and downs ahead. China has a more open capital account than in the past and global events may have some impact on the Chinese market. As such, the PBoC may be cushioning any potential volatility. This is more of a precautionary measure and should not be over-interpreted.

The market is discussing a rate cut, but we don’t agree

The market is actively discussing that the PBoC will cut the 7D policy rate and the medium-term lending facility (MLF) rate, which are currently at 2.0% and 2.75%, respectively. The discussion has intensified, especially after the PBoC announced a cut in the RRR this month.

We do not see the need for China to lower interest rates. The economy is recovering at this time, although not as fast as the market expected though this is due more to the market’s overestimation of the speed of the rebound. External markets are weakening and export activity will be dampened. But China’s interest rate cuts will not help exports. Moreover, an excessively accommodative monetary policy may attract some unnecessary investments. As the economy recovers more quickly in the second half of the year, interest rate cuts could pose a risk of economic overheating.

source: ING

Wells Fargo Financial Institution

The Federal Reserve will raise interest rates, but the end of the monetary contraction cycle is coming!

Wells Fargo Financial Institution: The Federal Reserve will increase interest rates, but the end of the monetary contraction cycle is coming!

The Federal Reserve increased its interest rate by 0.25% to 4.75-5%. Federal Reserve policymakers have raised interest rates by 4.75% over the past 12 months, the fastest rate of monetary tightening since the early 1980s. The Federal Reserve continued to maintain a relatively optimistic assessment of the current state of the economy. However, the central bank noted that recent developments will likely lead to tighter credit conditions and likely affect economic activity; Although the extent of these effects is unclear.

Previously, the Fed thought that a sustained increase in interest rates would be needed to bring inflation back to its 2 percent target, but now it thinks that some additional accommodative monetary policy may be in order. In short, the end of the Fed’s monetary tightening cycle appears to be coming. The median forecast for the terminal interest rate was only 0.25% higher than the previous forecast, and we expect the Fed to deliver another 0.25% rate hike at its next meeting.

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